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Perfect and imperfect competition (Revenue (Profit Maximation (MR-MC…
Perfect and imperfect competition
Pure Competition
Characteristics:
Very large number of sellers
Standardized products
Price Takers
Easy Entry and exit
No pricing power
Perfect competition
Purely Competitive demand
Characteristics:
Perfectly elastic demand
Chooses the output at any level (at market price) thus demand curve is horizontal.
MR won't change
Perfect competition
Revenue
Average Revenue
AR = TR/Q =P
Total Revenue
TR = P*Q
Straight upward sloping curve
Marginal Revenue
MR =Change in TR/change in Q
Coincide with the demand curve
Profit Maximation
TR-TC Approach.
The producer will want to produce where TR exceeds TC
MR-MC Approach
Use MR = MC rule, provided price is greater or equal to the average variable cost (AVC)
MR = P in a purely competitive environement
Loss minimizing case
Still produces where MR> AVC, but only till when MR =MC
Shut down case is when P<ATC
Short run supply curve. As long as P> AVC
Upsloping curve
Break even point. Where TC=TR
Average total cost
ATC =AFC + AVC
Imperfect competition
Monopolistic competition
Characteristics
Relatively large number of sellers
Product differentiation(therefore has some pricing power)
Easy entry and exit
Non-price competition
Monopolistic Competition and efficiency
Inefficient when:
P > min ATC (product inefficiency)
P> MC (Allocative inefficiency)
Excess capacity